Opportunity in crisis: The changing face of trade in Africa
The COVID-19 pandemic is expected to push the African continent into a recession for the first time in 25 years. Yet through innovation, partnerships and trade digitisation, Africa has a unique opportunity to advance sustainable trade both within and outside of the region.
In a few short months, COVID-19 upended Africa’s trade prospects. Forecasts from the beginning of the year had put the region’s GDP growth estimate at 3.9%, and global demand for Africa’s products was strengthening. Other positive regional factors from early 2020, such as robust private consumption, sustained investments in infrastructure, and rising oil production faded into pessimism as the economic impact of the pandemic unravelled.
“Africa has been affected by a triple whammy,” says Onyebuchi Memeh, head of trade, South Africa and Southern Africa, Transaction Banking, at Standard Chartered. “Demand for its raw materials in key global markets like China has declined due to shutdowns, and lockdown measures within African countries have affected logistics and cargo movement. In addition, the decline in oil prices has caused enormous challenges for economies including Nigeria and Angola.”
As a result, according to the World Bank’s biannual Africa’s Pulse report, the continent’s GDP is now expected to decline by as much as 5.1% this year, marking the first time Africa as a region has registered negative growth rates in a quarter of a century.
The impacts can already be seen throughout the region. The temporary disruption of supply chain linkages with the European Union, United States and China is expected to lead to a loss of US$2.4 billion in global manufacturing value chain exports, according to the International Trade Centre (ITC). And factory shutdowns in Asian markets have slashed Africa’s imports of goods, from fabrics to finished products.
Despite all of these complications, companies throughout the region have demonstrated a remarkable level of resilience, highlights Patrick Makau, head of trade, Kenya and East Africa, at Standard Chartered.
Opportunities closer to home
The crisis has created an opportunity for Africa to ramp up regional value chains, starting with the essentials. Distilleries and other manufacturing companies, including oil manufacturers, across the continent have switched production lines to manufacture hand sanitiser, while the clothing and textile sector – one of the hardest hit – has pivoted to meet the needs of the health sector, to great effect.
“East Africa is now mostly self-sufficient in personal protective equipment (PPE) production through local industries,” says Makau, adding that nearshoring (a trend already evident in Europe and North America) is now becoming apparent in Africa. Companies are starting to focus on their own local regional blocs and closer-to-home markets both for raw materials and their client base.
Despite being home to six of the world’s top-10 fastest-growing economies – Rwanda, Ethiopia, Côte d’Ivoire, Ghana, Tanzania, and Benin – intraregional trade in Africa still accounts for a comparatively low proportion of its exports. The most recent figures put this at 17%, versus 59% for Asia and 69% for Europe, leaving much room for growth. But some stumbling blocks remain, as Onyebuchi explains.
“Clients are beginning to think about different ways of doing business,” he says. “However, when we talk about nearshoring, it’s about companies trying to find or transfer resources to markets with a good regulatory environment and stable infrastructure. This is one of the things that we have found challenging in Africa.”
Yet progress has been made. Investments made in countries such as Ethiopia and Kenya have greatly improved rail connectivity, making regional transit of goods easier, while the establishment of special economic zones in countries such as Ghana and Nigeria are helping these countries to start local production centres.
As countries start to ramp up local manufacturing of domestically consumed products, there are also opportunities to take advantage of the forthcoming African common market to sell to wider targets. The implementation of the African Continental Free Trade Area (AfCFTA) – currently delayed as a result of the COVID-19 outbreak – is expected to strengthen the region’s value chains and reduce vulnerability to external shocks, as well as enable cross-border investment in infrastructure, which will further support regional trade.
Short-term collaboration, long-term benefits
Across the continent, leaders in the public and private sectors have taken decisive action to secure supply chains and keep trade moving. From the Nigerian Coalition Against COVID-19 (formed by the Central Bank of Nigeria to mobilise private sector resources), to Afreximbank’s Pandemic Trade Impact Mitigation Facility (PATIMFA), this short-term collaboration could also bring longer-term benefits by strengthening regional partnerships and connectivity.
“We have been positively surprised about the level of resilience across banking, government, and private sector enterprises,” says Makau. “That fortitude and desire to overcome problems has led to new linkages within regional blocs as opposed to the traditional trading partners, both from a buy and sell perspective. The agility around adapting and altering manufacturing bases and consumer bases in country stands out for me very strongly.”
To support this resilience, throughout the crisis, some banks have strengthened ties with local governments to provide much-needed liquidity and credit support.
“As an example, we have worked with the Kenyan Bankers’ Association to support corporates through credit risk enhancement, and through the Central Bank of Kenya we have been able to access an additional 1 percent of our capital reserve ratio to ensure that there is sufficient liquidity in the market to enable our clients to continue trading,” says Makau.
Strengthening the ecosystem
Collaboration doesn’t end there. There has also been a growing trend of large corporates seeking to shore up their smaller suppliers by leveraging bank support. “Banks have responded rapidly to ensure that there is liquidity in the market to support corporates as well as SMEs,” says Onyebuchi. “Although many of the clients we serve in the southern African cluster are typically large corporates, they have an ecosystem relationship with their smaller suppliers. We have started to connect those SMEs to buyers through supply chain finance, which has the dual impact of creating certainty in the physical supply chain for larger corporates as well as supporting the smaller suppliers.”
This has also driven an uptake in digital solutions, as corporates seek to gain better visibility over their supply chains to drive efficiencies. “Clients are asking us for new ways of supporting them to continue doing business,” says Onyebuchi. “In the past, when we asked some clients to sign up to digital solutions to initiate transactions, they were often reluctant to do so. Today, many of them see being digitally connected to their financial institutions and ecosystems as part of their business continuity plans.” He adds that this has opened up the conversation about digitisation, leading to a realisation that it is a core issue that companies, governments and regulators need to take more seriously.
The enormous health, societal and economic ramifications of COVID-19 on Africa are yet to be fully realised, and supporting trade will be essential to save both lives and livelihoods. With supply chains disrupted and export demand weakened, the impetus to strengthen regional trade linkages has arguably never been stronger. Today, through collaboration, innovation and agility, Africa has an unprecedented opportunity to advance its trading possibilities, paving the way for a resilient recovery from the pandemic.
This article first appeared in Global Trade Review (GTR).